Coppola Comment

There is a bit of maths in this post. Don't worry, it is really very easy - otherwise I wouldn't be doing it. (You all know about me and maths ....) Dean Baker has just produced this post pointing out that the existence of the US's trade deficit has implications for private sector saving levels. The point he is making is that it is not possible to have an increasing trade deficit while cutting the public sector deficit unless the private sector is prepared to spend more. Unfortunately this doesn't come across too clearly in his post, and it was misunderstood by people who read his post when I retweeted it on Twitter. Here's an example: Trade deficit + austerity = consumption boom, because arithmetic. Presumably same applies to UK…? cepr.net/index.php/blog… /ht @ frances_coppola — John H (@johnthelutheran) January 12, 2013 No, that isn't what Baker meant. Let me explain. Baker is implicitly using the sectoral balance equation, which in its simplest fo...

I found a couple of fascinating articles by Willem Buiter discussing the future of cash. They date from 2009, but are still current today. In fact, as they address the problem that cash creates in a negative rate environment, they are even more relevant now. The "zero lower bound" (ZLB) constraint on interest rates exists because of the presence of non-interest bearing forms of money in the economy, of which the most important is physical cash. Were all money entirely electronic and interest-bearing, negative nominal rates would have become reality years ago. But where there are non-interest bearing forms of money that are near-perfect substitutes for interest-bearing forms, the view is that at the ZLB investors will switch funds to non-interest bearing forms of money rather than accept loss of principal. In short, they will hoard cash. The effect of the ZLB constraint is to force central banks to adopt all manner of peculiar ways of forcing real interest rates below ze...

This tweet from MacroResilience caught my eye today: "In a world of interest-bearing money, money = govt bonds & The "liquidity trap" is a permanent condition, not a temporary affliction". And he then expanded his argument in  this post . The first thing to note is that nearly all money is interest-bearing - and not because central banks are paying interest on reserves, although this is a contributory factor. It is because nearly all money now is held in bank accounts and other forms of investment, and nearly all bank accounts and investments carry interest. Actually this has been the case for a long time, but the change in the last decade has been the ease with which people can move money around between accounts, funds and investments. As MacroResilience points out in his post, there is no reason for anyone to leave significant amounts of money in a non-interest bearing account. And I would add that there is no reason for anyone in the Western world to ke...

This post is written jointly with Tomas Hirst. I have been re-reading Irving Fisher's " Debt deflation ". Short and immensely readable, it remains one of the best explanations of financial crashes and depression in economics literature. But I am puzzled. What is going on at the moment doesn't quite fit, somehow. On the face of it, much of what has happened over the last six years fits all too well with Fisher's description of debt deflation. He identifies two prime causes of booms and busts - what he calls the "debt disease" and the "dollar disease". Over-indebtedness before the crash results in debt deflation after the crash - the "debt disease". And shortage of money in circulation leads to apparent over-production and crashing prices - the "dollar disease". The disastrous deflationary spiral experienced by the US in the Great Depression, and by several Eurozone countries at present, can be adequately explained by thes...

In recent articles in the Telegraph and the FT , Andrew Sentance called for the (permanent) end of quantitative easing and a return to higher interest rates in 2013 to counteract inflationary pressures in the UK economy. His reason for this is that that UK inflation has been higher than the Government's 2% target for most of the last five years, despite the Bank of England continually forecasting its imminent fall, and there are developing domestic and global pressures which will push up inflation over the next few months. The Bank of England recognises these in its short-term inflation forecasts but is still forecasting lower inflation over the medium term. However, it is fair to say that the Bank of England's record on inflation forecasting is somewhat tarnished, and Sentance is a reputable economist and a former member of the MPC. So his argument in favour of tighter monetary policy deserves careful consideration. The first thing to consider is Sentance's analysis of ...

The Bank of International Settlements has produced a paper discussing the global shortage of safe assets and suggesting a solution. It's a fascinating paper, not least because of the glimpse it affords into the looking-glass world of finance. I've noted before that to the financial world, the real economy is simply a source of resources to support financial trading and investment. If the BIS paper is anything to go by, so are governments. The background to this is the catastrophic failure of supposedly "safe" assets twice in the last five years - first residential mortgage-backed securities (RMBS) in the financial crisis of 2007-8, then Eurozone sovereign debt. Gary Gorton, in response to the failure of private sector "safe" assets, remarked that only governments can create "safe" assets. But not all governments can. The Eurozone crisis shows us that those that don't issue their own currency, those that are perceived by markets as being pr...

I write this post with some sorrow for what must end, and with both trepidation and curiosity (and, I admit, also with some excitement) about what the future holds. Ten years ago I left the high-pressure world of banking and finance, I thought forever. I had intended to leave years before, but the need to support a young family when my husband was out of work overrode my personal desire to - in the words of my little boy - "stay at home and do my big singing". But in 2012, following the breakup of my marriage, I decided that the time was right to leave. I was already teaching singing part-time and doing some professional singing, and I had gained my Royal College of Music Associateship in Singing Performance. Encouraged by my new partner, I took the plunge. I ended my consultancy at RBS and concentrated on building up my singing and teaching career. It worked stunningly well. Or at least the teaching did. All too well, actually. I quickly found myself working in schools d...